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TMI Blog2023 (10) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the same which should be considered for the purpose of Computation of Profit. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION OF PROFIT FROM SALE OF FIXED ASSETS - RS. 68,95,58,090 On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in adding back the said sales consideration as profit on sale of fixed assets which has already been considered in the turn-over by the company. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 3. Claim of Debenture Redemption Reserve (DRR') created during the year for Rs. 100 Crores On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in not allowing the Reserve created as per requirement of the statute towards redemption of debentures issued by the company as a deductible item for the purpose of working the tax liability u/s 115JB of the Act. The Ld. CIT(A) erred by holding that the DRR created is not in nature of a provision for ascertained liability in absence of specific provision under the Act." 3. In ITA No. 3568 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, misconceived, unjustified and bad at law therefore it should be quashed. 2. ADDITION U/S 41 ALLEGING CESSATION OF LIABILITY ON BASIS OF SOME INFORMATION RECEIVED - Rs. 1,609,565 The Dy. Commissioner of Income Tax has erred in adding back the said amount u/s 41 since the same has not been actually done by us in books of accounts." Section 80IA - Income from Other Sources: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 ITA No. 2741/Del/2017 : A.Y. 2012-13 Sale of Fixed Assets: ITA No. 5118/Del/2015 : A.Y. 2010-11 ITA No. 3568/Del/2016 : A.Y. 2011-12 5. Before us, the assessee submitted additional evidences under Rule 29 of the Income Tax (AT) Rules, 1963. It was submitted that the additional evidences could not be submitted before the authorities below and are of seminal importance. The plea of the assessee is found to be acceptable. Since, the revenue did not get the opportunity of owing to the evidences, in the interest of justice, we remand the matter to the file of the AO to consider the additional evidences and pass an order in accordance with the Income Tax Act. Claim of Debenture Redemption Reserve: ITA No. 5118/Del/2015: A.Y. 2010- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 115JB of the I. T. Act. Without prejudice to the aforesaid, even in this judgment the Hon'ble Court observed that an amount which is in excess of what is reasonably necessary for meeting a known liability shall be treated as reserve and not provision. 11. The assessee has placed reliance on section 117C of the Companies Act to emphasize the fact that transfer of Rs.100 crores during the year to the Debenture Redemption Reserve was mandatory for the appellant, as per the requirement of law. Section 117C of the Companies Act is reproduced below:- "Where a company issues debentures after the commencement of this Act, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, from out of its profits every year until such debentures are redeemed." 12. The question as to what amount is adequate for meeting the liability for redemption of debentures has been clarified by the Ministry of Corporate Affairs vide their circular no. 04/2013 dated 11.02.2013 issued vide F. No. 11/02/2012-CL-V(A), which reads as follows:- "The requirements with regard to adequacy' of Debenture Redemption Reserve (DRP) have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above shall not utilized for any purpose other than for the repayment of debentures maturing during the year referred to above, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below 15 percent of the amount of debentures maturing during the 31st day of March of that year. 13. Thus in the case of the assessee company, creation of a Debenture Redemption Reserve to the extent of 25% of the amount of debentures issued i.e. 25% of Rs. 500 crores or Rs. 125 crores only in all, would have been adequate to meet the requirement of the Companies Act, including section 117C on which the appellant has been vehemently placing reliance. 14. In other words, contrary to the claim of the appellant in its submissions before me, it was not mandatory for the appellant, to set apart Rs. 100 crores every year for 5 consecutive years beginning from F.Y. 2008-09 in order to provide for the redemption of the debentures in the years 2013, 2014 & 2015, because as per the circular no.04/2013 dated 11.02.2013 of the Ministry of Corporate Affairs, what was required to be credited to this reserve was only Rs.125 crores whereas the appellant has been tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income Tax [2004] 192 CTR 0408, Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285. Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690, Somaiya Orgeno- Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291. On the issue of Debt Redemption Reserve, again reliance is placed upon decision in National Rayon Corporation (supra) to the effect that the amount was neither a reserve nor a provision for unascertained liability so as to attract clause (b) or (c) of Explanation 1 to Section 115JB(2) of the Act. Revenue has contested and argued to the contrary. Decision of the Supreme Court in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, [2010] 320 ITR 577 (SC), was referred. 12. In order to appreciate the controversy, we would like to reproduce the provisions of Section 115JB of the Act as applicable to the assessment year 2007-08 reads:- [Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which 25[section 10 (other than the provisions contained in clause (38) thereof) or 26[***] section 11 or section 12 apply; or [(g) the amount of depreciation,] [(h) the amount of deferred tax and the provision therefor, [(i) the amount or amounts set aside as provision for diminution in the value of any asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by,--]] [(i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing assigned to it in clause (ga) of sub-section (1) of section 3 35 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the profit and loss account.] Explanation 2.-- For the purposes of clause (a) of Explanation 1. the amount of income-tax shall include- (i) any tax on distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time.] (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause. (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. (4) Every company to which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression―reserve by whatever name called‖. There could not have been more clarity and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i. e. book profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under Section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded. Guidance Note on revised Schedule VI to the Companies Act, 1956 by the Institute of Chartered Accountants of India would indicate that reserves and surplus are generally classified as; (a) capital reserve; (b) capital redemption reserve; (c) securities premium reserve; (d) debenture redemption reserve; and, (e) revaluation reserve or other reserves. In addition, there can be share options outstanding account and surplus, i.e. the balance in the statement of profit and loss disclosing allocations and appropriations such as divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with reference to the nature and character of sum retained and substance of the matter. The balance-sheet contains separate heads for ― reserve and surplus and ― current liabilities and provisions. 17. The aforesaid position still holds good when we refer to the Guidance Note issued by the Institute of Chartered Accountants of India on revised Schedule VI to the Companies Act, 1956 (December, 2011 Edition) in which it has been observed:- 8.1.2.1 Reserve: The Guidance Note on Terms Used in Financial Statements defines the term Reserve' as ― the portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. Reserves' should be distinguished from provisions'. For this purpose, reference may be made to the definition of the expression `provision' in AS-29 Provisions, Contingent Liabilities and Contingent Assets. As per AS-29. a `provision' is ― a liability which can be measured only by using a substantial degree of estimation. A liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be repayable. The obligation or liability to repay would not cease just because the fact that the date of repayment was deferred by an agreement, as the obligation was an ascertained liability. Therefore, the money set apart for redemption of debentures must be treated as money set apart to meet a known liability and the amount should be shown as a liability. In these circumstances, it was held that the amount set apart was not a ― reserve. Reference was made to Batliboi' s Advanced Accountancy with reference to nature of sinking funds and it was held that redemption of debenture would not be a ― reserve, though it was shown as ― reserve in the balance-sheet. An amount shown as a reserve is in the nature of allocation of profits and not a charge against them. The Debenture Redemption Reserve, it was held, was in the nature of charge against profits and not appropriation of profits. 21. We do not see how this decision can help and assist the appellant-assessee. 22. In respect of Debt Redemption Reserve of Rs. 18,66.00,000/-, no specific explanation was given; on what account and why the said reserve was created. Nothing has been shown or pointed out to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot be measured with sufficient reliability. The potential obligation is so uncertain that it should not be recognized in the accounts. A provision, therefore, is somewhat between accrual and the contingent liability. 25. The argument in respect of Section 45-IC of the Reserve Bank of India Act, 1934 and diversion of income at source is misconceived. The decisions of different courts including the Supreme Court and the Delhi High Court in the case of Molasses Storage Fund are inapplicable. Diversion of income at source by way of overriding title as a principle is applicable when under a statutory or contractual obligation or under the provisions of Memorandum and Articles of Association, the earning is divested and the assessed has no title over a particular receipt. When such charge exists, the amount or income so charged must be excluded from income of the assessed as income never reaches his hands and in fact belongs to a third person. Thus, the income stands diverted at source. Diversion of income at source implies that income or the amount mentioned therein belongs to a third party and was not income of the assessed. Similar question arose before the Supreme Court in As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position. The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and, it being a taxable receipt/ earning, it must be taken into account. 26. Section 45-IC of the Reserve Bank of India Act, 1934 reads as under:- 45-IC Reserve fund.--(1) Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. (2) No appropriation of any sum from the reserve fund shall be made by the non- banking financial company except for the purpose as may be specified by the Bank from time to time and every such appropriation shall be reported to the Bank within twenty- one days from the date of such withdrawal: Provided that the Bank may, in any particular case and for sufficient cause being shown, extend the period of twenty- one days by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not less than 20% of net profit every year can only be computed after net profit is calculated and computed. Reserve, so created is not a liability known or ascertained, even estimated. Section 45-IC ensures that a Non- Banking Finance Company does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. No separate bank account is required to be maintained. It is an added measure of protection created by the statute, to prevent defaults by the Non Banking Financial Companies. Section 45-IC of the Reserve Bank of India Act, 1934 also permits appropriation but in restricted or controlled manner by a Non Banking Financial Company. 30. Accounts in case of a company are prepared as a going concern assuming that the business will continue in the foreseeable future. To ascertain the net profit of each year, not only the current liabilities and the contingencies but future contingencies should also be considered. Thus, Chapter VI of the Companies Act in Part II and III provides for 'Provision' and 'Reserves' which relate to future payments, future needs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Commissioner Of Income Tax vide order 13 February, 2015 in ITA No. 371/2012 wherein the judgments of Hon'ble Apex Court in the case National Rayon Corporation Vs. CIT, Vazir Sultan Tobacco Company (supra), Molasses Storage Fund DCM Ltd. Vs. Commissioner of Income Tax [2004] 192 CTR 0408, Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285, Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690, Somaiya Orgeno-Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291. we hold that the provisions of Section 115JB(b) are applicable to the facts of the instant case. Addition u/s 41: ITA No. 2741/Del/2017 : A.Y. 2012-13 19. During the assessment proceedings, the AO received information from his counterpart DCIT, Circle-7(1)(2), Bangalore that the assessee M/s Wevin India Pvt. Ltd. has irrecoverably written off the amount of Rs. 16.09 lacs receivables from the assessee. The assessee continued to claim the same as sundry creditors in their books of accounts. The facts proves that the assessee is absolved of their liability of Rs.16 .09 lacs and hence, we hold that the ld. CIT(A) has rightly confirmed the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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